3 outcomes to watch as U.S. midterms draw near
Author: Kevin McCreadie
October 31, 2018
Investors have turned their focus towards U.S. congressional mid-term elections, but with the vote just days away, the potential impact on markets remains difficult to call and may largely depend on one of a few different voting outcomes.
1. Democrats take the House of Representatives, Republicans keep the Senate
This is the scenario that is most widely predicted and is already largely priced in by investors. Even so, a gridlocked Congress has the potential to rattle markets because it gives the Democrats a real opportunity to trigger impeachment proceedings against U.S. President Trump. While such efforts would most likely be thwarted by the Republican-heavy Senate and ultimately fall flat, the dirty laundry that would be aired as part of the process would be incredibly polarizing for the country and represents a huge potential headwind.
2. Democrats take both the House of Representatives and the U.S. Senate
This second scenario is not seriously anticipated by most pollsters and it’s hard to see it happening once the votes start to be counted. However, if it does become reality, the market reaction could easily be negative due to concerns it would jeopardize Trump’s pro-business agenda that has resulted in recent tax reforms and additional rhetoric of more fiscal spending to come. The impeachment process in this case, meanwhile, wouldn’t necessarily be worse than in the first outlined above. That’s because two-thirds of the Senate is required to pass a vote and even if the Democrats take the Senate, it’s highly unlikely they will win that many seats and/or convince enough Republican senators to cross the floor and join their cause to oust the U.S. President from office.
3. Republicans keep both the House of Representatives and the U.S. Senate
While also a bit of a stretch based on current forecasts, this outcome could be seen as a positive for equity markets. Not only does it represent the current status quo and quash impeachment proceedings outright, it likely ensures Trump’s pro-business agenda is not disrupted. The bond market, however, probably takes a bit of a hit if it results in even more fiscal spending in the U.S. That would be a huge red flag with the country’s unemployment rate below 4% and the government deficit at a six-year high of almost $800 billion.
With all of this mind, it seems clear that next week’s U.S. midterms could have serious implications for the future direction of markets. And when combined with other ongoing risks such as rising interest rates and global trade tensions, there’s good reason to believe more market volatility is in store over the weeks ahead.
Kevin McCreadie is President and Chief Investment Officer at AGF Investments Inc. He is a regular contributor to AGF Perspectives.
Commentaries contained herein are provided as a general source of information based on information available as of October 29, 2018 and should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities. Every effort has been made to ensure accuracy in these commentaries at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and the manager accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. Investors are expected to obtain professional investment advice.
AGF Investments is a group of wholly owned subsidiaries of AGF Management Limited, a Canadian reporting issuer. The subsidiaries included in AGF Investments are AGF Investments Inc. (AGFI), Highstreet Asset Management Inc. (Highstreet), AGF Investments America Inc. (AGFA), AGF Asset Management (Asia) Limited (AGF AM Asia) and AGF International Advisors Company Limited (AGFIA). AGFA is a registered advisor in the U.S. AGFI and Highstreet are registered as portfolio managers across Canadian securities commissions. AGFIA is regulated by the Central Bank of Ireland and registered with the Australian Securities & Investments Commission. AGF AM Asia is registered as a portfolio manager in Singapore. The subsidiaries that form AGF Investments manage a variety of mandates comprised of equity, fixed income and balanced assets.
About AGF Management Limited
Founded in 1957, AGF Management Limited (AGF) is an independent and globally diverse asset management firm. AGF brings a disciplined approach to delivering excellence in investment management through its fundamental, quantitative, alternative and high-net-worth businesses focused on providing an exceptional client experience. AGF’s suite of investment solutions extends globally to a wide range of clients, from financial advisors and individual investors to institutional investors including pension plans, corporate plans, sovereign wealth funds and endowments and foundations.
For further information, please visit AGF.com.
© 2019 AGF Management Limited. All rights reserved.